2016-07-18-Bain-Dealing_with_Two-Speed_China_28页_3mb

Summary of "Dealing with Two-Speed China"

Core Content

The China Shopper Report 2016 highlights the two-speed dynamics in China's fast-moving consumer goods (FMCG) market, where different categories, retail channels, and brands are experiencing contrasting growth rates. This divergence is driven by economic shifts, demographic changes, and consumer behavior.

Main Findings

1. Two-Speed Growth Trajectories Among Product Categories

• Overall FMCG value growth slowed to a five-year low of 3.5% in 2015, due to a decline in volume and slower price increases.
• Slow-growth categories include those traditionally catering to blue-collar workers, such as:
  • Instant noodles declined by 12.5% in volume.
  • Beer saw a 3.6% volume drop.
• Fast-growth categories are more aligned with white-collar workers and the growing middle class, such as:
  • Makeup grew by 15.5%.
  • Skin care grew by 13.2%.
  • Yogurt saw a 20.6% increase in value.
  • Pet food grew by 11.7%.
• Healthy and premium products (e.g., yogurt, functional drinks) outperformed traditional categories, reflecting a shift toward health-conscious and premium consumption.

2. Two-Speed Penetration and Premiumization

• Penetration rates for most categories have plateaued or declined, while premiumization has increased.
• Penetration is defined as the percentage of households purchasing a brand in a given year, with average penetration at 83% across 26 categories.
• Only 6 categories saw increased penetration from 2012 to 2015: yogurt, skin care, makeup, facial tissue, biscuits, and chocolate.
• Frequency of purchase remains low in most categories, with only 4 categories (milk, infant formula, biscuits, yogurt) seeing frequency above 10 times per year.
• Premium products (e.g., imported cosmetics, premium yogurt) continue to attract higher spending and higher growth.

3. Two-Speed Growth in Retail Channels

• E-commerce and convenience stores are expanding rapidly, while hypermarkets and traditional trade are declining.
• E-commerce growth rate exceeded 35% over the past four years, and online penetration increased from 25% in 2012 to 43% in 2015.
• Convenience stores grew by 13.2% in 2015, while super and mini markets saw a decline from 9.5% to 4.0%.
• Online shopping is becoming more prevalent in higher-tier cities, with Tier-1 cities accounting for 34% of FMCG purchases online, versus 65% in Tier-5 cities.
• Three clusters of categories were identified based on digital penetration:
  • High online penetration: Baby and beauty products dominate the e-commerce market.
  • Low online penetration: Chewing gum, fabric softener, and most beverages show little growth.
  • Mid-level penetration with high growth: Home care, personal care, and packaged food are seeing strong growth through aggressive digital promotion.

4. Two-Speed Growth for Local and Foreign Brands

• Local brands outperformed foreign brands, gaining 7.8% in sales, contributing to 109% of overall market growth.
• Foreign brands declined by 1.4%, particularly in categories like instant noodles, beer, and infant formula.
• Local brands benefit from:
  • Faster decision-making due to a single-country development process.
  • Agility in new product development, with companies like Shanghai Jahwa leveraging Chinese herbal beauty therapy to launch new SKUs.
  • Stronger e-commerce adoption, as they are more responsive to digital trends.

5. Geographic and Regional Growth Patterns

• Growth is now more evenly distributed across city tiers, with all tiers seeing FMCG growth in the 3% to 5% range.
• Tier-1 cities (e.g., Beijing, Shanghai) still have higher growth than Tier-2 and Tier-3.
• The Southwest region saw the fastest growth, while the Northeast and Southeast experienced slowest growth.
• Urban household spending on FMCG is slowing, and consumers are shifting more toward non-FMCG areas like travel, entertainment, and health.

Key Strategies for Brands

To thrive in this two-speed environment, brands should:

• Review cost structures and operating models to improve agility and speed in decision-making and execution.
• Adopt digital capabilities and mindsets, especially in marketing and sales.
• Adapt route-to-market strategies, focusing on winning channels and selective investment.
• Boost penetration through digital activation, while also enhancing product quality and premium offerings to sustain growth.

Conclusion

The two-speed dynamics in China’s FMCG market reflect a maturing economy, changing consumer preferences, and evolving retail landscapes. Brands must understand these trends and strategically align their offerings with the fast-growing and premium segments, while also optimizing for the slow-growth categories. Digital transformation and local responsiveness are key to success in this complex market.